Student Loan Debt and Retirement Planning

Written by: Kristyn Pilgrim
Updated: 8/27/20

Student loan debt is the fastest-rising debt for many Americans and is quickly becoming a burden on the U.S. economy. But while wages have increased for college graduates, so has the overall cost of education. 

How Does Student Loan Debt Impact Graduates? 

In 2018, 54% of college graduates had some type of student loan debt, graduating with $35,359 of student loan debt, on average, which can be hard to pay off right out of college. Notably, the impact can be felt in delayed homeownership, marriage, starting a business, and contributing to retirement. 

What Does This Mean for Retirement? 

Graduates with a significant amount of student loan debt may have to postpone their retirement to pay off that debt. And once they’ve paid off their student loans, many workers may have to juggle saving for retirement and funding their children’s higher education

In fact, 62% of all households nearing retirement save less than one times their annual income, which is significantly less than what the National Institute on Retirement Security says is necessary to maintain their current living standard. 

Although student loan debt is not the only cause, it is a leading factor in delaying saving for retirement. 

Should I Invest in My Retirement Even Though I Have Student Loan Debt? An Example

Even though saving for retirement while dealing with student loan debt may not seem like a priority, neglecting to save for your future can have ramifications. 

One borrower paid off $81,000 in student loans by the age of 31, but although she was debt-free, she was just starting her retirement savings. 

Here’s what she learned:

Take Advantage of Compound Interest 

  • By not saving earlier, she missed out on the opportunity of compound interest. 
  • Compound interest allows you to make money on the interest that you earn. Compound interest grows with time, which is why it’s important to start saving early. 

Make a Habit of Saving for Retirement 

  • Part of the battle is getting into the early habit of dedicating a portion of your paycheck to retirement savings. 
  • Starting to save earlier for retirement can help you learn what you can live off and how to budget accordingly. 

Although she paid off her student loan debt at 31, she also didn’t save a cent for retirement, which meant that she had to fight to catch up and prepare for the future. 

4 Tips for Saving for Retirement While Paying Off Student Loan Debt

We know that paying off student loans and saving for retirement simultaneously can be difficult, especially for those with high monthly student loan payments. However, it’s not impossible. The following tips can help set yourself up for future success.

1. Pay Off Higher-Interest Student Loans First

If you have multiple student loans with varying interest rates, it’s good to eliminate higher-interest debt first since you’ll save more money overall on interest and be able to meet other financial goals faster — like saving for retirement. This method is referred to as the “debt avalanche.”

Often, it is beneficial to pay off private student loans before federal student loans because they tend to have higher interest rates that are variable. Private loans are also not subsidized, so they start to accrue interest as soon as the funds are released. 

2. Look Into Another Repayment Plan 

You should always make the minimum payment toward your student loans each month. However, if you find yourself struggling to make the minimum payment while also saving for retirement, it might be a good idea to look into another repayment plan, especially if you’ve taken out federal student loans. The federal government offers several repayment plans that can make your monthly payments more affordable based on your current financial situation.

  • For those who’d like to reduce their monthly student loan repayment, consider an Income-Driven Repayment (IDR) plan. This type of plan is designed to help make student loan debt manageable by taking into account your outstanding debt and income.
  • If you have multiple federal student loans, you should be able to apply to consolidate those loans into a Direct Consolidation Loan, which can lower your monthly payment by giving you a longer period to repay your loans. It’s important to note, though, that you will likely have to make more payments and pay more interest than if you didn’t consolidate.
  • With a Graduated Repayment Plan, your student loan payments start low and gradually increase about every two years. This helps ensure that your loans are paid off within 10 to 30 years without having you struggle too much in the beginning.
  • The federal government offers two programs to help graduates eliminate their student loan debt: the Public Service Loan Forgiveness Program and Federal Student Loan Repayment Program. Although these programs do not always cover the entirety of your student debt, they can help you greatly reduce your remaining debt.
  • The Teacher Loan Forgiveness Program is offered to full-time teachers who have worked a minimum of five years in low-income schools or educational service agencies. Those who meet the requirements, plus additional qualifications, might be eligible for up to $17,500 in loan forgiveness on Direct Subsidized and Unsubsidized Loans and Subsidized and Unsubsidized Federal Stafford Loans.   

3. Start an Emergency Fund First 

If you don’t have emergency savings while paying off student loan debt, it might be good to save for a few months so that you have a financial cushion before you start saving for retirement.

Ensuring that you have a financial cushion can help prevent you from taking on more debt in case of an emergency. One of the best ways to establish a healthy financial life is having an emergency fund that covers three to six months’ worth of expenses. 

After establishing an emergency fund, you may then want to put extra funds toward saving for retirement.

4. Save for Retirement Early

It’s important to start saving for retirement as early as you can. Even at a minimum, if you save $200 each month toward retirement, you could have $120,000 saved in 50 years. 

Plus, many employers match employees’ retirement contributions through a 401(k), which can put your expected retirement funds much higher. Matching is essentially “free money,” so try to invest at least what your employer matches so that you can receive extra cash toward your retirement savings. 

All is not lost, though, if your company doesn’t offer a 401(k), as you can still open your own retirement account, like a Roth or traditional IRA, which come with tax benefits. For those making less than $32,000 as a single filer or $64,000 as a joint filer, you may also be eligible for a Saver’s Credit from the IRS that matches your contributions up to $2,000. 

An easy way to ensure that you’re saving for retirement is having a set amount that is automatically deducted from your paycheck. In doing so, you can adapt to a slightly lower paycheck and know that you’re saving for the future. 

Managing Student Debt While Investing in the Future

Planning for retirement while also paying off student loans may seem like a tough mountain to climb, but it’s not impossible. It just takes a little commitment to establishing good habits early on. 

With multiple student loans, you’ll want to pay off the higher-interest loans first. You’ll save the most money on interest and eventually be able to redirect those funds toward other financial goals like retirement. If you have federal student loans, you may also want to look into another repayment plan that works better for your current financial situation. And, if possible, take advantage of your employer’s retirement plan.

If you still have questions or concerns regarding your student loan debt, has the resources you need to get the most out of your college investment so that you can set yourself up for future success.